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April 1, 2012

Excessive Pattern Recognition In Forex Trading

When we design a forex trading method based on certain rules that underlying rationale, is that there are pattern embedded within the seemingly random ups or downs in the price movement, we believe there is order within chaos.

Certainly, the existence of such order is what we rely on in order to have a trading method which gives us an edge over the market.

All too ofter, we overdo it when we attempt to discover patterns within charts. The human mind is designed to recognise patterns within chaos that cause us to be eager and hasty in coming to conclusions about patterns on our charts. As we eye-ball the historical charts, we will be able to find many profitable trades based on some technical conditions, thereby leading us to arrive at conclusions about a trading strategy. We must acknowledge that our visual back-testing is under the influence of selective perception.

The forex trader who use technical analysis is their forex trading ofter deluded by illusions of order. In this case, the trading rules that one arrives at tend to be too simplistic. The market is too dynamic that we ofter need to apply some filters to the trading rules. Such filters cannot be clearly seen in our visual back testing.